Bond laws introduced in parliament

Given the market is not considered ‘deep’ or of’“high quality’, companies must use government bond rates to calculate the value of large liabilities, such as pensions, on their balance sheets. Illustration: Karl Hilzinger

Sally Rose

Legislation designed to encourage the development of Australia’s retail corporate bond market was introduced into the federal parliament on Wednesday.

It will allow companies to provide retail investors with a streamlined, two-part prospectus when issuing simple corporate bonds, making it easier for retail investors to understand what they are buying while reducing the burden on the issuer of preparing overly detailed documentation.

The law, a draft of which was released in January, also reduces potential legal liability that can attach to directors who misrepresent an offer, and allows for simple corporate bonds to be transferred from the wholesale to the retail market – in line with the approach adopted for retail trading in corporate government securities – through the introduction of simple corporate bond depository interests.

It is generally expected the law will be passed by both houses of parliament given it has bipartisan support.

Capital to grow

Most developed economies have established corporate bond markets, even if some of them have been pretty inactive of late. Fostering one in Australia is important for Australia’s economy because it provides companies with capital to grow.

Promoting a “deep” and “liquid” retail corporate bond market has been a key part of the government’s banking reform agenda. The Group of 100 – the peak body for CFOs – and other business groups have been calling on the government to do more to stimulate the wholesale corporate bond market for several years.

Group of 100 CEO Peter Meehan welcomed the introduction of the law but said more needs to be done before the retail market to provides an attractive alternative compared to wholesale debt or other form of capital raising. “The legislation falls short of what we wanted in terms of kickstarting the wholesale corporate bond market but it is a step in the right directions,” Mr Meehan said on Wednesday.

Mr Meehan said he was eager to see the regulations that will accompany the legislation. “At the moment it is not clear how the proposed reforms will actually work,” he said. Of particular interest is more detail on how the proposed trading mechanism will be implemented.

The absence of a mature corporate bond market in Australia has been weighing on Australian companies subject given international accounting standards. Given the market is not considered “deep” or of “high quality”, companies must use government bond rates to calculate the value of large liabilities, such as pensions, on their balance sheets.